Sunday, 13 March 2011

Merkel got her "pact for the euro" - but will it work?

(image by bundeskanzleramt)

The European Union leaders - except for Ireland´s Enda Kenny - have now said yes to German chancellor Angela Merkel´s euro rescue package, the "pact for the euro". A formal decision will be taken at a new summit in two weeks time. But there are serious doubts about whether the watered down pact actually will work:

Whether this works, though, depends will depend on how seriously the governments take their voluntary commitment to make reforms. They cannot be forced to carry out reforms by the other euro-zone states since the pact does not contain any provisions for sanctions.Past experience does not exactly inspire optimism. When Merkel presented her "pact for competitiveness" to her EU colleagues for the first time in February, there were angry protests from other euro-zone members. Some were reluctant to give up their inflation-adjusted wage increases, while other countries did not want to raise their retirement age or introduce a German-style "debt brake." The pact was typically German, they said, pointing out that there are different social-policy traditions within Europe.As a result, Merkel's proposals were diluted beyond recognition in week-long consultations until the pact was so noncommittal that all euro-zone leaders could agree to it. What is left is a general appeal for wage restraint and an increase in the retirement age, a commitment to rigorous budget and labor market reforms, and a harmonization of the corporate tax rate.